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Recession Odds: Fed Says Don’t Count On It

Keep calm and carry on. That at least is what the number crunchers at the Federal Reserve would lead us to believe about the economy.

Their models suggest there is only a 12% chance of a U.S. recession occurring sometime over the next 12 months, the lowest since February 2015. By comparison, these odds had spiked to 60% in February, the highest in the current economic expansion.

Like the weatherman who says there is a 15% chance of rain, though, all of these estimates should be viewed rather skeptically. For one, the February scare has, to this point, proven a false alarm.

More importantly, predicting recessions aren’t easy because they just don’t happen that often. Since 1973, when the Fed’s recession probability dataset begins, the U.S. economy has been in recession only 13% of the time. That also matches the amount of time the Fed has predicted the odds of a recession being greater than 50/50.

But the Fed hasn’t exactly covered itself in glory in its specific predictions. In May 2007, it pegged the odds of a recession at just 5%. And when the downturn began in December of that year, the Fed said there was only a 39% chance of a recession. Those odds ultimately reached a high of 99% in October and November 2008, right in the teeth of the financial crisis, suggesting this indicator might have more coincident than predictive power.

The Fed may be vital in many ways, but its forecasters seemingly exist mostly to make weathermen look good.